On the Brink: Inside the Race to Stop the Collapse of the Global Financial System

A book like this should be read only along with books like The Failure of Risk Management: Why It's Broken and How to Fix It or The Black Swan: The Impact of the Highly Improbable. These books are about the much broader topics of risk management and risk in finance, respectively, but they do put On the Brink in context.

Paulson has written a detailed, blow by blow, narrative account of several specific meetings leading up to and during the financial crisis. Less of the book deals with stepping outside of these meetings to analyze other specific causes, but there is some of that. The reader has to be careful of an attempt by Paulson to recast his own role in a more favorable light, but I haven't seen anything detailed enough to specifically contradict him, yet.

Paulson does mention an interesting and almost complete list of players in this crisis - Freddie, Fannie, Bernanke, Bush, etc. But he is almost silent on some of the more subtle players like the mathematical models that underestimated these risks (Taleb and Hubbard do and excellent job of this). He reiterates throughout the book that the events seemed "impossible" and yet they are events that seem to happen once or twice a century (Especially considering some of the relaxed regulation and oversight that preceeeded it).

He does mention the role of Credit Default Swaps in the crisis but not, say, the Gaussian Copula, Options, or Value at Risk. The use of such methods are at least partly to blame.

The reader has to assume Paulson's agenda of getting history to come out the way that casts him the way he would like to see it. But it is still an excellent account. We should like to see the accounts of Bernanke and Geithner someday and compare them side-by-side.

The book wastes no time on lengthy introductions or narrative preambles. The very first sentence is a direct question from President Bush to Paulson. ("Do they know it's coming Hank?" - "they" being Fannie Mae and Freddie Mac, and "it" being the seizure of the control of those companies by the government.) The overall narrative style of the book is very direct and conversational, which makes for an easy and straightforward read. This tone of voice is at odds with the more deliberate and cerebral image that we've got of Paulson from his public appearances. In my opinion, this is one of the virtues of the book - I don't think I would be able to sit through this many pages of Paulson's monotone, and all the technical jargon would have been unbearable. Instead, we get a very personal and personable account of one of the most difficult moments in the history of US financial system. Paulson is also very generous with bringing up details of his own life, which make him even more relatable. My personal favorite was his admission that he needs eight hours of sleep at night. It may be a small thing, but I believe that good night's rest is severely underappreciated and undervalued, especially in high-power circles like the financial sector.

In the chapter on Paulson's personal life before joining the Bush administration we learn about the main highlights of his biography. The chapter is not long, even though Paulson has enjoyed a very versatile and interesting career. He had worked in Nixon administration, but since then has largely stayed out of politics. His family is very liberal, which makes for some interesting conversations at the dinner table and family reunions I'd imagine.

The chapter on the economic and financial turbulence that preceded the great banking crash of 2008 is very fascinating and educational. Even though it deals with many subtle and technical topics, it is written extremely well and even people who have never been exposed to the inner workings of the financial system should be able to follow it without much difficulty. Even so, it is impossible to keep track of all the moving parts that constitute such a complex system, so if you feel that you still don't understand everything that went wrong, you are not alone. It is doubtful that even those who were in charge of situation at the time fully appreciated the problems that were brewing.

The chapter on Bear Stearns crisis in March of 2008 is a fascinating study in behind-the-scenes happenings of one dire crisis. Most of the most important events happened over one tumultuous weekend, and this chapter details all of the relevant negotiations that were going on at the time. We are led to believe that the bailout of Bear Stearns was inevitable, and the least evil of all options that were on the table at the time. Paulson keeps stressing that a failure of the government to act at that moment would have had major serious ramifications for the entire financial sector (a theme that he comes back to throughout the book), but he doesn't go into the details of why in fact this would have been the case.

By late March, however, it became increasingly obvious that another major financial institution was working under an increased strain. Lehman Brothers was having major difficulties, and unless something got done about it the company was headed for a collapse. However, it is still not entirely clear why this should be the government's problem. A collapse of such an important player would certainly have dire consequences and would unsettle many investors, but it is not clear that this would cause the collapse of the entire financial system. Meanwhile, the problems with Fannie Mae and Freddie Mac continued to simmer, with no immediate political solution in sight.

When the summer rolled in, the crisis with Fannie Mae and Freddie Mac was coming to a head. For better or worse the requisite government measures that Paulson was proposing had much more support among the Democrats than Republicans. This is not surprising at all - they were in control of Congress and had much more leverage which to use to get their own legislative agenda through, including the very unpalatable block grants. Fannie Mae and Freddie Mac were becoming amenable to government's terms, and by the end of summer it started to seem that the worst was over.

Unfortunately, the sense of calm was not to last. In September it became obvious that Lehman Brothers would not survive and to Paulson and others in the Treasury Department it became an imperative to work out a deal with private buyers to rescue Lehman. Paulson insists that during the negotiation with the potential buyers the position of the US government was very clear: there will be no government financing of the rescue. However, the very fact that the government worked so industriously and doggedly at rescuing Lehman must have sent a signal to anyone that government felt that it had to do absolutely anything in its power to help Lehman survive. It is hard to imagine that this not have a very strong impact on potential buyers when they were looking into their options. At the very least it would have made them extremely skittish to risk their own money to bail out a competitor when it was more than likely that the government would eventually have to do the same without their help. In fact, there was no legal way for the government to help, but that was not exactly clear to the potential buyers. In the end the most serious potential buyer, UK's Barclays, decided against buying. After that the faith of Lehman Brothers was sealed; they had to file for Chapter 11 bankruptcy within a week.

And that's when the wheels really started to come off the cart. The bankruptcy of Lehman Brothers sent shockwaves through the World markets that no one had anticipated, or so are we led to believe. Soon enough investors around the world started having doubts in solvency of other major investments banks, and it started to look like all of them might soon be under the peril of having to declare bankruptcy. The whole World financial system, so it seemed, was on a brink of total collapse. The consequences of such a dire predicament would have been catastrophic indeed, on par with the Great Depression, or worse.

We also finally learn where the $700 billion dollar TARP price tag came from. In a nutshell, if the total value of all the mortgages in the US is $11 trillion, and only about 10% of those are in a peril of imminent foreclosure, then about $1 trillion would sound like a reasonable amount of money that needed to be available for a bailout. However, $1 trillion sounds pretty bad, so if you can make it look like much less than that it would politically be much more feasible to get the Congress to foot the bill. Many pundits in the media had suspected as much, but it's good to finally get a confirmation from Paulson himself. To me at least, it looks rather sketchy that the secretary of the Treasury would be making such off-the-cuff estimates of required funds. I would have much preferred that there were a much more solid technical analysis that had led to this number.

Most of the rest of the book is a blow-by-blow narrative of how Paulson worked with various government officials, prominent politicians from both houses, and top-level bankers on coming up with the plan and legislation that would help prevent the total financial collapse. This narrative can be rather gripping and high-paced at times, but there are also moments when it overwhelms with technical details. However, these details in my opinion are absolutely necessary for the purpose of this story.

Fortunately, there is a glossary of all the terms and acronyms at the end of the book. There is also a list of all the main protagonists at the beginning. Unless you are complete political and economic information junky, you will definitely appreciate both of these lists.

In one aspect this book may not be able to achieve its goals. In terms of pure politics, the narrative raises many red flags for those who have a nagging suspicion that Paulson is in fact a committed big-government Republican, or even worse - a RINO. He is a bit too quick to praise some very prominent Democrats (like Barney Frank, Barack Obama, Chris Dodd, etc.) and is either mute on characterizing some Republican political operatives (Karl Rove), mostly critical (John McCain), or largely critical (Sarah Palin). His appraisal of President Bush is rather too defensive (He's a good guy, honest!) and seems to be geared more towards appeasing liberals (including all the members of his immediate family) than towards reaffirming his standing with the small-government conservatives. In fact, Bush is the only Republican politician that features even remotely prominently throughout the book. His attitude towards Chinese government officials is a bit troubling as well. I understand that as the chairman of Goldman Sachs he had built his reputation and fortunes by working closely with Chinese market, but it's a not a good sign when on several occasions a Chinese official that Paulson interacted with comes across as a more market-oriented of the two. I might be misreading those particular anecdotes, but my gut-level impression supports the notion of Paulson being a big-government politician, his repeated support for free markets notwithstanding.

The final chapter of the book ("The Afterward") is a bit puzzling as well. It is not strictly speaking an afterward of the policies that had been implemented, but more of a chapter dedicated to the lessons that he took home from the crises. Most of those lessons seem very plausible, but I feel that there is an inherent contradiction between some of his positions. On one hand he decries the fact that the top ten US financial institutions control some 60% of the overall market, and yet he calls for an increased control and regulation. The last time I checked it is exactly the excessive regulation that is favorable to the existence of few big companies. The smaller ones just don't have enough resources to invest into the ever more burdensome regulatory compliance.

However, the strangest aspect of the afterward is that there is no reappraisal of TARP and other controversial policies that had been talked about in this book. A year has passed since Paulson left the office, and even thought it still might be too early to make a complete analysis, certain general comments could have been made. As is we are left to make up our own mind about the legacy of those policies. In particular, I would have liked to hear his take on other major financial interventions that have happened under the Obama administration. Many of those policies, rightly or wrongly, see TARP as the template on which they were based. I was really surprised to find Paulson mum on this subject.

All of the shortcomings aside, this is an extremely fascinating and very readable book. It gives a first-hand account of the epicenter of the worst financial crisis since the Great Depression, and the seriousness of the situation is very palpable from every page. The dire situation could also be compared to some other non-financial crises, like the Cuban Missile Crises for instance. In fact, I think it would even make a good movie. It would be fun to see who would get to play Paulson.

"On the Brink" is Hank Paulson's attempt to set the record straight after months of being excoriated in the media and the political sphere following his stint as Secretary of the Treasury. Indeed, it is hard to think of a Secretary of the Treasury in recent years who's come under greater fire or scrutiny than Paulson, who here is attempting to get in on the first draft of history. In his own words Paulson comes off every bit as bombastic, hard-charging, egocentric, and conceited as he was in print, in person, and as Secretary of the Treasury. And that's both a good and bad thing. It certainly makes for interesting and lively reading, as Paulson recounts his efforts to stave off financial collapse, and virtually around-the-clock efforts to prop up failing financial institutions. But on the downside there's a lack of mea culpas, or insight into what he felt were failings or misgivings about the courses he chose along with Fed Chairman Bernanke and New York Reserve Chairman Geitner. And for someone normally so self-assured, there are moments where Paulson has a lack of clarity or insight into who pushed for what courses of action. But you do get a sense Paulson was at least trying to do SOMETHING, which was in marked contrast to the rest of the Bush Administration at the time. But there's little here in the way of new news, secret tidbits or untold stories. While it does add somewhat to our understanding of how events unfolded, they hardly come from an objective, unbiased, and impartial observer.

There's the adage in politics that if you're involved in a scandal, the best move is to get out in front of it, tell the truth, and let the chips fall where they may. Clearly Paulson has no interest in a future career in politics, and that's evidenced by "On the Brink". If there is anything he wants to come clean about, it's certainly not here. Paulson hews to the same line he gave before Congress, in the media, and in interviews, which you to believe either he is telling the truth or he's a damned good liar. Ultimately "On the Brink" isn't going to sway people who have already made up their mind about Paulson, and worse still it comes across as a rather callow attempt to cash in on efforts to understand the economic and financial collapse. I had hoped to gain greater insights into what thoughts crossed Paulson's mind as events unfolded, and certainly that is here, but the sense I came away with most, was how utterly on-the-fly everything happened, with no time for analysis, reasoning, or consideration. The primary objective was to act and to behave in a decisive manner. That Paulson surely did. But after the fact major players in events have a chance to consider their actions and in effect debrief themselves on how well or how poorly they did. Sadly, Paulson does that here yet finds few faults with what he did, and that's a shame.

Fascinating account of the whirlwind of activity going on behind the scenes to avert one crisis after another. The pace and scope of efforts to keep the major banks and then the overall economy operating is staggering. While many are critical of the TARP program it is now apparent that the capital injections were the right remedy at the time.

True, it is one man's account. And Hank Paulson is not an objective observer of the events of 2007-2008. But I certainly got the sense that the man was making a good faith attempt to be honest, transparent, and candid in his retelling of this vital story. Well-written with a mimimum of jargon. Highly recommended.